Telecom Act of 1996 – United States telecommunications law

The Telecommunications Act of 1996 was the first significant overhaul of United States telecommunications law in more than sixty years, amending the Communications Act of 1934. The Act, signed by President Bill Clinton, represented a major change in American telecommunication law, since it was the first time that the Internet was included in broadcasting and spectrum allotment. One of the most controversial titles was Title 3 (“Cable Services”), which allowed for media cross-ownership. According to the FCC, the goal of the law was to “let anyone enter any communications business—to let any communications business compete in any market against any other”. The legislation’s primary goal was deregulation of the converging broadcasting and telecommunications markets. However, the law’s regulatory policies have been questioned, including the effects of dualistic re-regulation of the communications market

Prior regime

Previously, the Communications Act of 1934 (“1934 Act”) was the statutory framework for U.S. communications policy, covering telecommunications and broadcasting. That act created the Federal Communications Commission (FCC or “Commission”), which was to implement and administer the economic regulation of the interstate activities of the telephone monopolies and the licensing of spectrum used for broadcast and other purposes. However, the Act explicitly left most regulation of intrastate telephone services to the states.

In the 1970s and 1980s, a combination of technological change, court decisions, and changes in U.S. policy permitted competitive entry into some telecommunications and broadcast markets. In this context, the Telecommunications Act was designed to open up markets to competition by removing unnecessary regulatory barriers to entry.

Stated objective

The Act’s stated objective was to open up markets to competition by removing regulatory barriers to entry: The conference report refers to the bill “to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced information technologies and services to all Americans by opening all telecommunications markets to competition”. Congress attempted to create a regulatory framework for the transition from primarily monopoly provision to competitive provision of telecommunications services.

Enactment

The Act was approved by the 104th Congress on January 3, 1996, and signed into law on February 8, 1996, by President Bill Clinton. It was the first bill signed in cyberspace and the first bill signed at the Library of Congress.

Framework

The 1996 Act sought to foster competition among companies that use similar underlying network technologies (e.g., circuit-switched telephone networks) to provide a single type of service (e.g., voice). For example, it creates separate regulatory regimes for carriers providing voice telephone service and providers of cable television, and a third for information services.

Preemption. One key provision allowed the FCC to preempt state or local legal requirements that acted as a barrier to entry in the provision of interstate or intrastate telecommunications service.

Interconnectedness. Since communications services exhibit network effects and positive externalities, new entrants would face barriers to entry if they could not interconnect their networks with those of the incumbent carriers. Thus, another key provision of the 1996 Act sets obligations for incumbent carriers and new entrants to interconnect their networks with one another, imposing additional requirements on the incumbents because they might desire to restrict competitive entry by denying such interconnection or by setting terms, conditions, and rates that could undermine the ability of the new entrants to compete.

Intercarrier compensation. Under these conditions, many calls will arise between parties on different networks. While it might be possible to have the calling party pay its carrier and the called party pay its carrier, for various reasons it has been traditional in the United States for the calling party’s carrier to pay the called party’s carrier for completing the call — this is called intercarrier compensation—and, in turn, recover those costs in the rates charged to its subscribers. The 1996 Act requires that intercarrier compensation rates among competing local exchange carriers (CLECs) be based on the “additional costs of terminating such calls”. However, the framework created by the 1996 Act set different intercarrier compensation rates for services that were not competing at that time but do compete today.

RBOCs may enter long distance. To foster competition in both the long distance and local markets, the 1996 Act created a process by which the Regional Bell Operating Companies (“RBOCs”) would be free to offer long distance service (which was not permitted under one of the terms of the 1982 Modified Final Judgement settling the government’s antitrust case against the former Bell System monopoly) once they made a showing that their local markets had been opened up to competition. The list of Bell Operating Companies in the bill are: Bell Telephone Company of Nevada, Illinois Bell Telephone Company, Indiana Bell Telephone Company, Incorporated, Michigan Bell Telephone Company, New England Telephone and Telegraph Company, New Jersey Bell Telephone Company, New York Telephone Company, U S West Communications Company, South Central Bell Telephone Company, Southern Bell Telephone and Telegraph Company, Southwestern Bell Telephone Company, The Bell Telephone Company of Pennsylvania, The Chesapeake and Potomac Telephone Company, The Chesapeake and Potomac Telephone Company of Maryland, The Chesapeake and Potomac Telephone Company of Virginia, The Chesapeake and Potomac Telephone Company of West Virginia, The Diamond State Telephone Company, The Ohio Bell Telephone Company, The Pacific Telephone and Telegraph Company, or Wisconsin Telephone Company

Wholesale access to incumbents’ networks. To allow new entrants enough time to fully build out their own networks, the Act requires the incumbent local exchange carriers to make available to entrants, at cost-based wholesale rates, those elements of their network to which entrants needed access in order not to be impaired in their ability to offer telecommunications services.

Universal service support made explicit. Prior to enactment of the Act, universal service had been funded through implicit subsidies, levied as above-cost business rates, urban rates, and above-cost rates for the “access charges” that long distance carriers paid as intercarrier compensation to local telephone companies for originating and terminating their subscribers’ long-distance calls. Recognizing that new entrants would target those services that had above-cost rates, and thus erode universal service support, Congress included in the 1996 Act a provision requiring universal service support to be explicit, rather than hidden in above-cost rates. This requirement has only been partially implemented, however, and therefore significant implicit universal services subsidies still remain in above-cost rates for certain services.

Policy considerations of new environment

The regulatory framework created by the 1996 Act was intended to foster “intramodal” competition within distinct markets, i.e., among companies that used the same underlying technology to provide service. For example, competition was envisioned between the incumbent local and long distance wireline carriers plus new competitive local exchange carriers, all of which used circuit-switched networks to offer voice services.

It did not envision the intermodal competition that has subsequently developed, such as wireless service competing with both local and long distance wireline service, VoIP competing with wireline and wireless telephony, IP video competing with cable television. Providers from separate regulatory regimes have been brought into competition with one another as a result of subsequent deployment of digital broadband technologies in telephone and cable networks. Voice and video services can now be provided using Internet protocol and thus might be classified as unregulated information services, but these services compete directly with regulated traditional voice and video services. Moreover, these digital technologies do not recognize national borders, much less state boundaries.

Given the focus on intramodal competition and the lack of intermodal competition, there was little concern about statutory or regulatory language that set different regulatory burdens for different technology modes. As a result, the current statutory and regulatory framework may be inconsistent with, or unresponsive to, current market conditions in several ways:

Service providers that are in direct competition with one another sometimes may be subject to different regulatory rules because they use different technologies. Some examples are:

For certain long distance calls, if the caller uses a wireless telephone number, the caller’s wireless carrier is subject to a cost-based “reciprocal compensation” intercarrier compensation charge for the termination of that call. But if the caller made an identical call, from the same location to the same called party, using a wireline telephone (and hence a wireline long distance carrier), that carrier would be subject to above cost “access charges” for the completion of the call.

When a long distance call is made to a called party’s wireline telephone, that party’s wireline local exchange carrier can charge the calling party’s long distance carrier an above-cost access charge for terminating the call; but if an identical long distance call were made to ths same called party, from and to the same physical location, but to the called party’s wireless telephone, the called party’s wireless carrier is not allowed to charge the calling party’s long distance carrier any access charge for terminating the call. Indeed, the average intercarrier compensation rate ranges from 0.1 cents per minute for traffic bound to an information service provider (“ISP”) to 5.1 cents per minute for intrastate traffic bound to a subscriber of a small (rural) incumbent local exchange carrier; individual rates can be as low as zero and as high as 35.9 cents per minute — even though in each case basically the same transport and switching functions are provided. (See CRS Report RL32889, Intercarrier Compensation: One Component of Telecom Reform, at pp. 2-5.)

the Federal Universal Service Fund is funded through an assessment on interstate telecommunications service revenues that exceeds 10% (the exact assessment rate varies from quarter to quarter); information services, even if they compete directly with the interstate telecommunications services, are not assessed.

Economic regulations intended to protect against monopoly power may not be fully taking into account intermodal competition.

The framework may not effectively address interconnection, access, and social policy issues for an IP architecture in which multiple applications ride on top of the physical (transmission) network layer.

Generally speaking, the number of broadband networks is limited by cost constraint—huge, sunk, up-front, fixed costs—which do not apply to applications providers. In this new environment, there will be three broad categories of competition:

1. intermodal competition among a small number of broadband network providers that offer a suite of voice, data, video, and other services primarily for the mass market;

2. intramodal competition among a small number of wireline broadband providers that serve multi-locational business customers who tend to be located in business districts; and

3. competition between these few broadband network providers and a multitude of independent applications service providers. (In addition, there will continue to be niche providers that offer consumers users competitive options for specific services.)

These three areas of competition will all be affected by a common factor: will there be entry by a third broadband network to compete with the broadband networks of the local telephone company and the local cable operator?

There are four general approaches to the regulation of broadband network providers vis-a-vis independent applications providers (At present, the FCC follows the last two approaches):

structural regulation, such as open access;

ex ante non-discrimination rules;

ex post adjudication of abuses of market power, as they arise, on a case-by-case basis;

and reliance on antitrust law and non-mandatory principles as the basis for self-regulation.

There is consensus that the current universal service and intercarrier compensation mechanisms need to be modified to accommodate the new market conditions. For example, the current universal service funding mechanism is assessed only on telecommunications services, and carriers can receive universal service funding only in support of telecommunications services. Thus, if services that had been classified as telecommunications services are re-classified as information services, as recently occurred for high-speed digital subscriber line (“DSL”) services, then the universal service assessment base will decline and carriers that depend on universal service funding may see a decline in support. It therefore may be timely to consider whether the scope of universal service should be expanded to include universal access to a broadband network at affordable rates, not just to basic telephone service.

The 1996 Telecommunications Act is divided into seven Titles:

Title I, “Telecommunications Service”: Helps to outline the general duties of the telecommunication carriers as well as the obligations of all Local Exchange Carriers (LECs) and the additional obligations of Incumbent Local Exchange Carriers (ILECs).

Sec. 102. Eligible telecommunications carriers.

Sec. 103. Exempt telecommunications companies

Sec. 104. Nondiscrimination principle.

Sec. 151. Bell operating company provisions.

Title II, “Broadcast Services”: Outlines the granting and licensing of broadcast spectrum by the government, including a provision to issue licenses to current television stations to commence digital television broadcasting, the use of the revenues generated by such licensing, the terms of broadcast licenses, the process of renewing broadcast licenses, direct broadcast satellite services, automated ship distress and safety systems, and restrictions on over-the-air reception devices

Outlines regulations regarding obscene programming on cable television, the scrambling of cable channels for nonsubscribers, the scrambling of sexually explicit adult video service programming, the cable operators’ refusal to carry certain programs, coercion and enticement of minors, and online family empowerment, including a requirement for the manufacture of televisions that block programs using V-chip technology. Title V also gives a clarification of the current laws regarding communication of obscene materials through the use of a computer.

Sec. 501. Short title.

Sec. 502. Obscene or harassing use of telecommunications facilities under the Communications Act of 1934.

Sec. 507. Clarification of current laws regarding communication of obscene materials through the use of computers.

Sec. 508. Coercion and enticement of minors.

Sec. 509. Online family empowerment.

Sec. 551. Parental choice in television programming.

Sec. 552. Technology fund.

Sec. 561. Expedited review.

Title VI, “Effect on Other Laws” : Outlines the applicability of consent decrees and other laws and the preemption of local taxation with respect to direct-to-home sales.

Sec. 601. Applicability of consent decrees and other law.

Sec. 602. Preemption of local taxation with respect to direct-to-home services.

Title VII, “Miscellaneous Provisions” : Outlines provisions relating to the prevention of unfair billing practices for information or services provided over toll-free telephone calls, privacy of consumer information, pole attachments, facilities siting, radio frequency emission standards, mobile services direct access to long distance carriers, advanced telecommunications incentives, the telecommunications development fund, the National Education Technology Funding Corporation, a report on the use of advance telecommunications services for medical purposes, and outlines the authorization of appropriations.

Sec. 709. Report on the use of advanced telecommunications services for medical purposes.

Sec. 710. Authorization of appropriations.

The Act makes a significant distinction between providers of telecommunications services and information services. The term ‘telecommunications service’ means the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.’ On the other hand, the term ‘information service’ means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service. The distinction comes into play when a carrier provides information services. A carrier providing information services is not a ‘telecommunications carrier’ under the act. For example, a carrier is not a ‘telecommunications carrier’ when it is selling broadband Internet access. This distinction becomes particularly important because the act enforces specific regulations against ‘telecommunications carriers’ but not against carriers providing information services. With the convergence of telephone, cable, and internet providers, this distinction has created much controversy.

The Act both deregulated and created new regulations. Congress forced local telephone companies to share their lines with competitors at regulated rates if “the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer” (Section 251(3)(2)(B)). This led to the creation of a new group of telephone companies, “Competitive Local Exchange Carriers” (CLECs), that compete with “ILECs” or incumbent local exchange carriers.

Most media ownership regulations were eased, and the cap on radio station ownership was eliminated.

Title V of the 1996 Act is the Communications Decency Act, aimed at regulating Internet indecency and obscenity, but was ruled unconstitutional by the U.S. Supreme Court for violating the First Amendment. Portions of Title V remain, including the Good Samaritan Act, which protects ISPs from liability for third-party content on their services, and legal definitions of the Internet.

The Act codified the concept of universal service and led to creation of the Universal Service Fund and E-rate. The Act employs the following terms of art: “Information service” which is defined as:

“The offering of a capability for generating, acquiring, storing, transforming, :processing, retrieving, utilizing, or making available